Asymmetric Information and Signaling

by  Alex Tabarrok in

MRUniversity now has its own video production team! We are continuing to work with the artists at Tilapia films to produce outstanding videos for teaching economics–these videos work great with our textbook, Modern Principles. Our in-house production team will be working to polish our “regular” videos in a way that enhances the learning experience. You can see an example of the new style in the video below featuring Tyler on signaling.

Our Principles of Economics course is now complete. You can guess what is coming soon!

*Mate*, by Tucker Max and Geoffrey Miller

by  Tyler Cowen in

I’ve found Geoffrey Miller’s earlier books quite interesting, even if I didn’t always agree with them.  A few years ago, however, he had a um…Twitter mishap…and since then I’ve been wondering what would emerge from that process.

His new book is…different.  Think of it as a guide to dating and mating for males, but unlike the pick-up artists he (with Max) focuses on the separating rather than the pooling equilibrium.  That is, he advises men to actually be better men, and not just to send clever signals, and so the subtitle is Become the Man Women Want.  Hard to argue with that, right?

The advice covers such recommendations as “Focus on the women who seem interested in you.” (p.257) and “Hang out with Intelligent People” (p.127), among other maxims.  Didn’t Nietzsche come up with a few of those?  Or was it Norman Vincent Peale?

Be aware that “She’s been dealing with creepy douchebags for a long time”; that’s a subheader (p.35).

Is it true that “Most guys have sexually repulsive feet, and women notice.”? (p.206)  MR readers are not always the ones to ask.

At first I thought I’ve never seen a market product so cleverly designed to segregate the actual buyers from those who will find it of value, but it has lots of five-star reviews on Amazon.  Sadly enough, maybe America really needs this book.

Addendum: Here is Robin Hanson’s review.

The Measured Working Man

by  Tyler Cowen in

That is the title of my new piece in MIT Technology Review. It’s about a near future where bosses can measure the productivity of workers through software and surveillance more accurately than is now the case.  Productivity will go up, but it is not all rosy, here is one excerpt:

Individuals don’t in fact enjoy being evaluated all the time, especially when the results are not always stellar: for most people, one piece of negative feedback outweighs five pieces of positive feedback. To the extent that measurement raises income inequality, perhaps it makes relations among the workers tenser and less friendly. Life under a meritocracy can be a little tough, unfriendly, and discouraging, especially for those whose morale is easily damaged. Privacy in this world will be harder to come by, and perhaps “second chances” will be more difficult to find, given the permanence of electronic data. We may end up favoring “goody two-shoes” personality types who were on the straight and narrow from their earliest years and disfavor those who rebelled at young ages, even if those people might end up being more creative later on.

The closer is this:

I wonder, by the way, if MIT Technology Review will tell me how many people clicked on this article.

Do read the whole thing.

Best estimates are that American debt cannot be fixed with taxes on capital

by  Tyler Cowen in

D’Erasmo, Mendoza, and Zhang have a new NBER working paper on this question.  It is the most serious and scientific approach to American debt sustainability I have seen, ever.  Here are two key sentences:

The dynamic Laffer curves for these taxes [capital taxes in the U.S., labor taxes in Europe] peak below the level required to make the higher post-2008 debts sustainable.

And:

The results of the applications of the empirical and structural approaches paint a bleak picture of the prospects for fiscal adjustment in advanced economies to restore fiscal solvency and make the post-2008 surge in public debt ratios sustainable.

One point the authors emphasize is that, unlike after earlier episodes of American debt binges, America today has not reestablished a comparable primary surplus.  The authors suggest taxes on labor or consumption can restore fiscal solvency, but higher taxes on capital won’t work, given dynamic and Laffer curve considerations.  They do not devote comparable attention to changes in the trajectory of government spending.

It is wrong to call this “science” outright, but it is the closest to science we have on these questions.  There is a possibly different ungated copy here (pdf).

And along related lines, consider this new Brookings study of boosting the top tax rate to fifty percent, by Gale, Kearney, and Orszag:

We calculate the resulting change in income inequality assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest.

You will not hear everyone shouting that one from the rooftops.  And of course it does not all get redistributed to the bottom twenty percent, believe it or not.

Why is the American prison population going up so much?

by  Tyler Cowen in

Slate has an interesting interview with Leon Nayfakh speaking to John Pfaff, here is the critical excerpt from Pfaff:

What appears to happen during this time—the years I look at are 1994 to 2008, just based on the data that’s available—is that the probability that a district attorney files a felony charge against an arrestee goes from about 1 in 3, to 2 in 3. So over the course of the ’90s and 2000s, district attorneys just got much more aggressive in how they filed charges. Defendants who they would not have filed felony charges against before, they now are charging with felonies. I can’t tell you why they’re doing that. No one’s really got an answer to that yet. But it does seem that the number of felony cases filed shoots up very strongly, even as the number of arrests goes down.

You will note that district attorneys are relatively politically independent at this level.  And this:

But just letting people out of prison—decarcerating drug offenders—will not reduce the prison population by as much as people think. If you released every person in prison on a drug charge today, our state prison population would drop from about 1.5 million to 1.2 million. So we’d still be the world’s largest incarcerating country; we’d still have an enormous prison population.

Keep in mind that some in prison on drug charges are actually violent offenders who did a plea bargain down to a drug charge.

The interview also offers evidence against alternative explanations of the boom in the prison population, such as putting the blame on longer sentences.  Here is Pfaff’s home page and his related papers.

How is China’s Silk Road initiative going?

by  Tyler Cowen in

Not so well:

…the time when the country was able to make economically unprofitable investments on the basis of political motives is long gone. Beijing had intended to invest more than $900 billion in infrastructure expansion in Eurasia. However, the money is now needed to stabilize its stagnating economy and nervous financial markets. China‘s currency reserves decreased drastically in August.

Due to financing difficulties a number of infrastructure projects have come to a standstill. For example, the gas pipeline known as “Power of Siberia,” the subject of an agreement signed by Russia and China in May last year, is in danger of flopping. In addition to this, the release of funds for the construction of the Altai gas pipeline to connect western Siberia and China has been delayed indefinitely.

At a more basic level, the OBOR represents an economic step backwards: instead of placing more emphasis on domestic demand, Beijing is speculating on new export markets in unstable regions such as Pakistan. The overcapacity of Chinese state-owned enterprises are not addressed but simply exported abroad. In this way the leadership is hampering its own ability to overcome the structural crisis of the Chinese growth model.

For the time being, OBOR remains a speculative bubble…

At the same time, there is a lack of partners for the OBOR initiative: China is virtually on its own. The Chinese leadership has until now only been able to reach a handful of vague cooperation agreements, such as those with Russia and Hungary. But none of those states (and maybe not even China itself) know what OBOR really means. Xi Jinping wants to promote the idea of a “community of common destiny”. He has, however, not been able to convey what this term signifies and he has failed to convince other states why the OBOR should be attractive for other countries.

The full story is here, and here is my earlier post on The New Silk Road.

Claims about cars

by  Tyler Cowen in

New high-end cars are among the most sophisticated machines on the planet, containing 100 million or more lines of code. Compare that with about 60 million lines of code in all of Facebook or 50 million in the Large Hadron Collider.

The Gelles, Tabuchi, and Dolan NYT piece is interesting throughout.  I thought of a parallel with empirical research in economics.  In the 1980s, often you could pick up a research paper and know rather quickly how good it was, if only by glancing at the basic technique and source of data.  These days the model, estimation, and data collection are so complicated and non-transparent that the errors, however large or small they be, are very difficult to find.

Helping Bryan Caplan homeschool his children

by  Tyler Cowen in

Bryan Caplan is homeschooling his twin sons, and some of that involves bringing them into Carow Hall and GMU to hang around the rest of us.  They are perhaps the only twelve year olds taking an advanced undergraduate class in labor economics; I think they can handle it.

Bryan asked if I would give them a lecture of sorts, of course I sad yes, and, oddly or not, he chose the topic of Art History for me (others around know some economics too, so perhaps that is indeed my comparative advantage).  I found it an interesting exercise to ponder what I would start telling them about, given they have virtually no background in the area, and perhaps I’ll get back to that in a future post.

In the meantime, I have two general points.  First, introducing your children to additional role models and sources of inspiration — your friends and co-workers, or so one should hope — is one of the best things you can do for them.  Most wealthy, famous, and well-educated parents under-invest in this activity.  The bottom line is that after some margin you stop influencing them, but they don’t stop looking around for sources of influence.

Second, if you are well-known, or have lots of well-known and/or talented friends, or maybe even if not, you should consider homeschooling your children for a while in this manner, if only for a month or two over the summer.  Your friends will be willing to give some form of instruction to your children, and they will be way, way better than normal teachers.

My next lecture for Bryan’s children will be History of American Popular Song, complemented with musical tracks of course, though no singing.

Addendum: Here are comments from Stationary Waves.

What should we think of the Chinese cap and trade announcement?

by  Tyler Cowen in

You’ll find a list of skeptical worries here from Chris Buckley, most of them justified.  In a nutshell, if you can’t believe their gdp numbers you also can’t believe their cap and trade plan.  I am nonetheless more optimistic about this recent development.  It signals a few things:

1. The Chinese have decided to make “doing something about carbon” a potential source of soft power in the international arena.  They are giving themselves an option on this path, and in the meantime trying to minimize the reputational deficit they face from being the world’s largest source of carbon.

2. The Chinese plan to cut pollution in at least some of their major cities soon, and they want to claim credit for that action in advance.  (In fact they are surprised how rapidly some of those days of blue skies have appeared in Beijing, whether that be the added regulation or the economic slowdown.)  “Carbon emissions” and “pollution” are hardly identical, but still the government is repositioning itself rapidly on the issue of pollution more generally.  This is one welcome part of that broader shift, so don’t worry if not all the details add up.

3. The Chinese leadership expects the domestic economy to be weak for a while, so they can announce a semi-serious carbon cap and meet it, without actually giving up any economic growth.  Of course this #3 isn’t good news on the economic front, but maybe the Chinese government first does need a period of time where such a policy has zero economic cost.

The evidence from the European Union is that their cap and trade program hasn’t worked well, mostly because of time consistency problems, namely that more and more permits are issued and the cap ends up weak over time.  That same problem may or may not apply to China.  But even a strong pessimist about cap and trade can be modestly optimistic about the new Chinese announcement.

Is this the most effective development program in history?

by  Tyler Cowen in

I will turn the mike over to Chris Blattman:

It’s a business plan competition for $50,000, and I think it’s a contender.

In 2011 the Nigerian government handed out 60 million dollars to about 1200 entrepreneurs, and three years later there are hundreds more new companies, generating tons of profit, and employing about 7000 new people.

David McKenzie did the incredible study.

24,000 Nigerians applied, the government selected about 6,000 to get some training and advice to develop their plan, the plans were scored, and about 1,200 were funded. They got an average of $50,000 each. Fifty thousand US dollars! Who the hell thought this was a good idea?

All the highest scoring plans got funded automatically, but McKenzie worked with the government to randomize among the runners up.

The results are amazing. Looking just at the people who had no firm to begin with, 54% of the control group have a firm after three years, compared to 93% of those who got the grant. And these firms are bigger. Just 11% of the control group have a firm with at least 10 employees, compared to 34% of those who got the grant. They’re more profitable too.

If you are the President of a developing country, one of the great problems that will occupy your thoughts is: how to get more people jobs? How to grow domestic businesses? Even I, Mr. Cash, did not think big grants would be the answer.

These entrepreneurs are not the deserving poor, to be sure, but the employees are more likely to be. They made $143 a month, so they probably weren’t the poorest of society. But 7000 people earning $7 a day they might not have earned otherwise—that is something. And this ignores the multiplier: the expansion of suppliers, the people employed by the 7000 employees spending that money, the taxes collected by the state, and so on.

Two other things occur to me:

  1. What if, in 10 years, we learn that after all the struggle to build infrastructure and services and other stuff was bullshit, and ALL ALONG we should have just been funneling more cash to the middle and bottom. I do not believe the cashonistas should go so far, but today I wonder.

  2. I should start responding to all the emails I get from Nigerians promising me $50,000 in cash.

*The Economist* endorses ngdp targeting

by  Tyler Cowen in

…it makes sense to look beyond inflation—and to consider targeting nominal GDP (NGDP) instead…

A target for nominal GDP (or the sum of all money earned in an economy each year, before accounting for inflation) is less radical than it sounds. It was a plausible alternative when inflation targets became common in the 1990s. A target for NGDP growth (ie, growth in cash income) copes better with cheap imports, which boost growth, but depress prices, pulling today’s central banks in two directions at once. Nominal income is also more important to debtors’ economic health than either inflation or growth, because debts are fixed in cash terms. Critics fret that NGDP is hard to measure, subject to revision, and mind-bogglingly unfamiliar to the public. Yet if NGDP sounds off-putting, growth in income does not. And although inflation can be measured easily enough, central banks now rely nearly as much on estimates of labour-market “slack”, an impossibly hazy number. Most important, an NGDP target would free central banks from the confusion caused by the broken inflation gauge. To set policy today central banks must work out how they think inflation will respond to falling unemployment, and markets must guess at their thinking. An NGDP target would not require the distinction between forecasts for growth (and hence employment) and forecasts for inflation.

There is more here, congratulations to Scott Sumner and others…